Inflation is the result of devaluing the currency by creating money (i.e. deficit spending).
Oil prices do not cause inflation. Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere.
> Increases in the price of X cause the demand for X to drop
There has been a lot of "demand destruction", but because oil is an intermediate input to so many things, especially anything that requires transporting, what actually happens is it forces up the overall price level.
It's simply following the facts and the history of inflation in economies.
If oil forces up prices, that means people have less money to spend on other things, which reduces demand for them, which reduces prices.
The only way to get a general price increase is to increase the money supply.
Inflation numbers track the deficits, with a lag of about 13 months.
And when was the last time oil price reductions caused deflation?
Deficit spending isn't the only way to increase the money supply. Lowering interest rates and increasing loans is another.
People go into debt to pay for expenses and necessities.
In fact here's a simplified model: oil prices increase, oil stocks go up, shareholders borrow against them and pay for gasoline. No government deficits were created but the money supply increased due to oil prices going up.
The federal deficit, however, is not being paid back, and so the increase in the money supply causes inflation.
The same thing happens when you write a check. You create money by writing the check. When the check is cashed, the money is transferred, and the check is no longer valid.
Same with using a credit card.
I strongly suspect this definition strongly correlates with what most people call inflation (my fuel bill went up! and strangely, not heading to work wasn't really an option).
If printing value-free money wasn't how we are ruled, we could even come up with a diversified scheme where an alchemist could discover a way of turning silicon into gold and it wouldn’t affect the economy much.
People seem to have very odd views on inflation. “Eggs have doubled in price therefore real inflation is 100%”
The basket of goods and different figures are all there, build your own basket if you want and come out with your own inflation level. Don’t just gut feeling it.
Now there are legitimate issues — if the cost of 1kg of pasta hasn’t changed, but it is no longer available int he shops near you, then that’s a problem.
Nope. Because if you spend more on one commodity, you necessarily spend less on other items. Spending less means less demand, and corresponding price reductions.
This is the Law of Supply and Demand at work.
Which also explains inflation - more money dumped into the economy, without a corresponding increase in the goods & services in the economy, devalues the money (see Law of Supply and Demand), which we call "inflation".
Money is not "special", and is subject to the LoSaD just like everything else.
Look what happened to Beanie Babies' prices when Tyco flooded the market with them. What do you think would happen to the price of Ferraris if Ferrari quadrupled production?
Why do you think Argentina's inflation is way down? It's the reduction in deficit spending. Do you think the Weimar Republic's trillion-to-one was caused by oil prices?
Though I agree that printing new money causes inflation (not all economists agree!), inflation does not have to be the result of new money creation. Shifts in behavior can lead to short term changes in price levels. All inflation is measured relative to a basket of goods. If prefs change for diff goods, then price levels (and thus inflation) can change.
> Oil prices do not cause inflation. This is probably not true in the short term. If the input costs for everything go up, then price levels change, and the CPI basket likely changes (up).
If we more reasonably measured inflation as some notion of quality of life, then increases in energy prices (which factor into everything) would definitely reduce per capita material well-being.
> Increases in the price of X cause the demand for X to drop, as people shift their spending elsewhere. My point is that if you have a collection of people who can just barely afford something, and the price of that thing goes up just a little, those people will not be able to buy it. A person who gets priced out of participating in society (and, e.g., dies) contributes nothing to inflation. On the other hand, folks who have some capacity to adjust their consumption or who have a savings /capital buffer, may be able to reallocate funds to the purchase of oil (or other goods whose prices are increasing). This can lead to a further rise in the price of goods (hence, inflation).
Printing doesn’t cause inflation, releasing it into the economy does. Giving it all to one person in a Brewster millions challenge is unlikely to, as they aren’t going to be able to spend much.
Elasticity of goods has entered the chat. If a significant amount of inelastic goods' price increase, cue inflation. Energy costs, especially fuel, are classic drivers of inflating prices.
That's what politicians want you to believe ("Putin's price hike"), to divert attention from the real cause, massive deficits, which are the fault of the politicians.
BTW, Rockefeller dropped the price of kerosene by 70%. Why was there no deflation?
> Commodity prices going up definitely causes inflation.
Nope. The proof is when they come down, there is no deflation.